RBI’s VRRR auction gets tepid response, again
- June 8, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
RBI’s VRRR auction gets tepid response, again
Subject :Economy
Section: Monetary Policy
RBI uses reverse repo auctions to suck excess liquidity from the banking system. Banks choose to park the excess liquidity through these Reverse Repo auctions when:
- There is certainty about near term interest rate
- The reverse repo rate is sufficiently higher than the overnight call money rate. (which is the short term borrowing rate in case of a shortfall in liquidity)
Market experts say banks are preserving liquidity because:
- RBI’s monetary policy stance remains as “withdrawal of accommodation”, banks, fearing sudden liquidity mismatches, seem to be holding back on deploying funds in the auctions
- advance tax payments will lead to outflows in mid-June.
- VRRR auction allows banks to park funds only for 15 days, hence only small amounts are allotted by the banks.
Government impact on banking liquidity:
- Government spending: Government through spending on both capital and revenue fronts contributes to the liquidity in the banking system. Currently the additional liquidity is from the Rs. 87,000 crore dividend that RBI has given to the government.
- Maturity of government securities: When banks buy a government security they pay for an asset the value of which they will get at maturity. When securities mature, the banks have added liquidity.
Variable Reverse Repo (VRR) Auction Repo rate is the rate at which the central bank issues loans to commercial banks in case of shortage of funds. It is used to control inflation. A reverse repo is a fixed or variable interest rate at which banks lend to RBI. VRRR is a subdivision of reverse repo. The VRRR is usually undertaken to reduce surplus liquidity by withdrawing existing cash in the system. Repo rate is the rate at which the central bank issues loans to commercial banks in case of shortage of funds. It is used to control inflation. A reverse repo is a fixed or variable interest rate at which banks lend to RBI. VRRR is a subdivision of reverse repo. The VRRR is usually undertaken to reduce surplus liquidity by withdrawing existing cash in the system. Concept:
How Does It Work?
Long Term Reverse Repo Operation (LTRO)
Operational Guidelines For VRR Auction
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